PNB's record loss at Rs 5,367 cr: Why Jaitley's funding plan will go for a toss

The quantum of bad loans hidden in the balance sheets state-run banks appears to be much bigger than originally anticipated.

On Wednesday, public sector lender Punjab national Bank (PNB) reported a record Rs 5,367 crore loss for the March-quarter on account of a sharp rise in bad loans and subsequent provisions (Rs 10,485 crore). In total, nine PSBs that have announced their March earnings have posted cumulative losses of over Rs 14,000 crore. PNB sold Rs 1,832 crore bad loan to ARCs in the last six months.

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It shows the extent of the bad loan problem that has gripped PSBs and a strong reminder to finance minister Arun Jaitley about the huge capital requirement of PSBs, much more than what he originally promised to infuse (Rs 70,000 crore by 2019).

What is more worrying is this. The pain will likely continue until the economic recovery takes firm hold and since banks have to adhere to the March 2017 deadline set by the Reserve Bank of India (RBI) to clean up their books.

Take a look at PNB’s numbers: The bank has Rs 11,000 crore of loans under the special mention accounts-2 (SMA-2) category, which means these loans are overdue for 60 days and is on the watch list to become non-performing assets (NPAs). This is something Firstpost had highlighted earlier. PNB also have a restructured loan book of Rs20,000 crore.

“This is by far the highest ever increasing in NPA by any bank which has reported numbers so far. The point of worry is that the bank believes the cleaning up exercise of balance sheet is not over. We believe pain to continue in FY17 also,” Angel Broking said in a note on Wednesday.

Higher chunk of SMA-2 loans would mean that the chunk of loans that are on the verge of turning bad has risen substantially this year. One reason why SMA-2 has swelled to this extent is there are several habitual late payers in the banking sector, including state-run discoms.

Technically, these loans are standard but not far from falling in to the NPA category. Under the RBI norms, a loan is tagged as NPA only when interest payments are overdue on the 91st day.

Other PSBs which have reported numbers have been hit by high NPAs. Bank of Baroda posted loss of Rs 3,230 crore in the March-quarter as compared with Rs 598 crore in the year-ago period. UCO Bank’s quarterly loss stood at Rs 1,715 crore as against Rs 209 crore, Allahabad Bank’s loss rose to Rs 581 crore from Rs 203 crore and that of Dena Bank stood at Rs 326 crore as against Rs 56 crore in the corresponding period last year.

Until December end, of the total Rs 4 lakh crore GNPAs in the banking sector, Rs 3.6 lakh crore was on the books of state-run banks. About 10-11 percent of total bank loans given are estimated to be stressed assets. More trouble can come if restructured accounts, which are currently standard, turn NPAs in the absence of strong economic recovery.

The gross non-performing assets (GNPAs) of banks could rise to 6.9 percent by March 2017 in a “severe stress scenario” due to sluggishness in the economy, according to a finance ministry report that cited RBI data. An amount of Rs 1,30,156 crore was classified as NPAs in public sector banks for borrowers exceeding Rs 500 crore as on December 2015, according to the finance ministry data.

In the event of the economic recovery getting delayed further, the pain will persist on the books of banks. This is something the PNB management has highlighted while announcing the March-quarter earnings.

One thing is sure. Finance minister Arun Jaitley will have to rethink its strategy to recapitalise banks. The government’s current capital infusion plan will prove to be inadequate given the worsening bad loan situation.